Atul Ltd Management Discussions.

Ratios UoM 2018-19 2017-18 Increase : (Decrease) Remark
Interest coverage times 192.00 56.78 238% reduction of debt to nil
Net profit margin % 11.16 8.85 26% better price realisation
Return on net worth % 17.70 13.11 35% higher net profit margin

Atul Ltd has identified 2 reporting segments, namely, Life Science Chemicals and Performance and Other Chemicals.

CROP PROTECTION

Product groups: Herbicides, Insecticides, Fungicides, Others

The products falling under these product groups are used by customers belonging to Agriculture and Crop Protection Chemicals industries. The product groups comprise about 20 products and 40 formulations. 2,4-D, Indoxacarb, Isoprothiolane, Propoxur and Sulfonyl urea herbicides are some of the key products.

During 2018-19, sales increased by 16% from Rs 651 cr to Rs 754 cr. Sales in India increased by 13% from Rs 232 cr to Rs 263 cr; bulk sales in India increased by 36% from Rs 126 cr to Rs 171 cr whereas brand sales which are currently only in India decreased by 13% from Rs 106 cr to Rs 92 cr. Sales outside India increased by 17% from Rs 419 cr to Rs 491 cr and formed 65% of the total. Decrease on account of volume was 9%. Sales increased mainly because of good demand and higher price realisation for one of the key herbicides. The Company completed 1 project and undertook 3 projects for implementation.

The size of the world Agriculture, Forestry and Fisheries industry is estimated at US$ 3.2 tn and is growing at about 3%. The size of the world Crop Protection Chemicals industry is estimated at US$ 56 bn and is growing at about 5%. The Food and Agribusiness forms a larger US$ 5 trillion world industry. If the current trend continues, caloric demand will increase by about 70% and crop demand for human consumption and animal feed will nearly double by 2050.

This necessitates increased use of pesticides. The Company will participate in this growth by - i) focusing on providing its customers with the best quality products, ii) meeting the growing world regulatory demands for product stewardship, iii) expanding the product portfolio and leveraging the strength of the Company in certain chemistries, iv) promoting its brand sales and v) improving its manufacturing and working capital efficiencies.

Floods or famines may adversely affect the demand. Fluctuations in foreign exchange may impact sales realisations. Given that some of these chemicals can be toxic, it is essential to take due care in their manufacture and use. Registration costs are high in certain countries.

PHARMACEUTICALS AND AROMATICS - I

Product groups: API intermediates, Active Pharmaceutical Ingredients, Others

The products falling under these product groups are used by customers belonging to Pharmaceutical industry for various therapeutic categories, such as anti-depressant, anti-diabetic, anti-infective, anti-retroviral and cardiovascular. The product groups comprise about 72 products. Carbonates, chloroformates, isocyanates and organic ureas are some of the key classes of products.

During 2018-19, sales increased by 43% from Rs 367 cr to Rs 526 cr. Sales in India increased by 34% from Rs 218 cr to Rs 293 cr. Sales outside India increased by 56% from Rs 149 cr to Rs 233 cr and formed 44% of the total. Growth on account of volume was 24%. The Company completed 1 project and undertook 1 project for implementation. Atul Bioscience Ltd (ABL), a 100% subsidiary company, acquired manufacturing facilities of Polydrug Laboratories Private Limited at MIDC, Ambernath. Sales of ABL for 2018-19 increased by 37% from Rs 76 cr to Rs 104 cr, primarily because of volume; it completed 2 debottlenecking projects and undertook 2 projects for implementation.

The size of the world Pharmaceutical industry is estimated at US$ 1.75 tn, of which the conventional pharmaceutical segment is estimated to be US$ 1.3 tn. Of this, the size of the world API industry is estimated to be US$ 160 bn. Biologics is estimated to contribute about 52% of sales of top 100 products by 2022, while Oncology will remain the largest therapy area in sales growing at about 12.7% CAGR. Worldwide Pharmaceutical R&D spend is estimated to grow by 2.4% CAGR to about US$ 181 bn in 2022, with about US$ 4 bn R&D spend per New Molecular Entities (NME) over the last 10 years.

There are about 20 major companies which dominate the world marketplace. The main user industry, namely, Pharmaceutical, is growing well because of increasing awareness about diseases and health. The Company along with ABL will participate in this growth by i) widening its market reach, ii) increasing its manufacturing efficiencies, iii) generating and adding capacities, iv) introducing new products and v) forming long-term strategic alliances with other companies.

The prices of some products may come down in a short time. Fluctuations in foreign exchange may impact sales realisations.

AROMATICS - II

Product groups: Intermediates, Perfumery, Others

The products falling under these product groups are mainly used by customers belonging to Fragrance and Personal Care industries. The product groups comprise about 20 products. para Cresol, para Anisic Aldehyde, para Anisyl Alcohol and para Cresidine are some of the key products.

During 2018-19, sales increased by 32% from 539 cr to Rs 711 cr. Sales in India increased by 50% from Rs 150 cr to Rs 225 cr. Sales outside India increased by 25% from Rs 389 cr to Rs 486 cr and formed 68% of the total. Growth on account of volume was 7%. The Company completed 1 project and undertook 2 projects for implementation.

The world market for paraCresol (a key product) is estimated at 65,000 mt and is growing at about 2%. Though earlier the product used to be manufactured in the UK and the USA, China and India are now major suppliers of the product. The size of the world Fragrance industry is estimated at US$ 13 bn and is growing at about 4%. The size of the world Personal Care industry is estimated at US$ 415 bn of which personal care ingredients segment is US$ 24 bn and is growing at about 4%.

The main user industries, namely, Fragrance and Personal Care, are growing well due to an improved standard of living. The Company will participate in this growth by i) broadening its market reach, ii) increasing its manufacturing efficiencies, iii) generating and adding capacities and iv) introducing new products.

The prices of some products may come down in a short time. Fluctuations in foreign exchange may impact sales realisations.

BULK CHEMICALS AND INTERMEDIATES

Product groups: Bulk chemicals, Adhesion promoters, Others

The products falling under these product groups are used mainly for internal consumption and by customers belonging to Cosmetic, Dyestuff, Pharmaceutical and Tyre industries. The product groups comprise about 21 products. Resorcinol, Resorcinol Formaldehyde Resins, 1,3-Cyclohexanedione, Anisole, SulphurTrioxide, Chlorosulphonic Acid and Caustic Soda are some of the key products.

During 2018-19, sales (external) increased by 42% from Rs 175 cr to Rs 249 cr. Sales in India increased by 34% from Rs 112 cr to Rs 150 cr. Sales outside India increased by 57% from Rs3 cr to 99 cr and formed 40% of the total. The Company undertook two projects for implementation.

The world market for Resorcinol (a key product) is estimated at US$ 550 mn and is growing at about 2.5%. The size of the world Tyre industry is estimated at US$ 229 bn and is growing at about 3.7%. The size of the world Chlor-alkali industry is estimated at US$ 45 bn and is growing at about 3.2%.

The Tyre industry is expected to grow further because of increasing population on the one hand and improving standard of living on the other. The captive consumption of bulk chemicals is expected to grow as the Company expands manufacturing capacities of its various products. The Company will participate in this growth by i) widening its market reach,

ii) increasing its manufacturing efficiencies,

iii) generating and adding capacities and

iv) introducing downstream products.

The demand and prices of bulk chemicals are cyclical in nature. Fluctuations in foreign exchange may impact sales realisations.

COLORS

Product groups: Dyestuffs, Pigments, Dye-intermediates, Textile chemicals, others

The product groups comprise about 587 products. The products are used by customers belonging to Textile, Paint and Coatings and Paper industries. Pigment Red 168, Sulphur Black 1 and Vat Green 1 are some of the key products.

During 2018-19, sales increased by 21% from Rs 452 cr to 547 cr. Sales in India increased by 21% from Rs 236 cr to Rs 285 cr. Sales outside India increased by 21% from Rs 216 cr to Rs 262 cr and formed 48% of the total. The Company completed five projects. Rudolf Atul Chemicals Ltd (RACL), a joint venture company formed in 2011-12, provides a complete range of textile chemicals in Indian market; it increased its sales by 14% from Rs 73 cr to Rs 83 cr, primarily because of volume.

The size of the world Dyestuff industry is estimated at US$

6.1 bn and is growing at about 3.5%. China is the largest manufacturer of dyes followed by India. The world market for high performance pigments is estimated at US$ 5.2 bn and is growing at about 4.0%.

The main user industries, namely, Textile, Paper, Paint and Coatings, will continue to grow because of growing population and increase in discretionary spending. The Company along with RACL will participate in this growth by i) broadening its market reach in new geographies, ii) increasing its manufacturing and working capital efficiencies and iii) introducing new dyes, pigments, textile chemicals and products for non-textile applications.

Fluctuations in foreign exchange and availability of raw materials may impact sales realisations. Treatment costs are expected to remain high given thatthe manufacture ofdyes and pigments generates significant pollutants.

POLYMERS

Product groups: Epoxy Resins, Curing agents, Reactive diluents, Sulfones, Protective paints and Adhesives based on Epoxy, Synthetic rubber, Polyurethane, Cyanoacrylate, PVC and PVA.

The products falling under these product groups are used by customers belonging to Aerospace, Automobile, Composites, Construction, Defence, Electrical and Electronics, Footwear, Paint and Coatings, Paper, Sport and Leisure and Wind Energy industries. The product groups comprise about 96 synthetic products and 300 formulations. B11, P62 and P101 are some of the key products. Synthetic and formulated products are versatile and has significant applications in Aerospace, Automobile, FRP Composites, Wind Energy, Electrical and Electronics, Paint and Coatings, Construction, Defence, Sport and Leisure and Paper industries.

During 2018-19, sales increased by 22% from Rs 858 cr to Rs 1,048 cr. Sales in India increased by 23% from Rs 580 cr to Rs 711 cr; bulk sales in India increased by 22% from Rs 487 cr to Rs 593 cr, whereas retail sales increased by 27% from Rs 93 cr to Rs 118 cr. Sales outside India increased by 21% from Rs 278 cr to Rs 337 cr and formed 32 % of the total. Growth on account of volume was 5%.

The world market for epoxy resins and curing agents is estimated at US$ 7.3 bn and is growing at about 2% and Indian market is estimated at US$ 285 mn and is growing at about 6%. There are about seven major companies which dominate the world marketplace. The world market for sulfones (curing agents) is estimated at US$ 367 mn and is growing at about 5%.

The user industries, Construction, Defence, Electrical and Electronics, Paint and Coatings are growing well particularly in India. The Company will participate in this growth by

i) widening its market reach

ii) increasing its manufacturing and working capital efficiencies, iii) generating and adding new capacities of epoxy resin and curing agents by organic and inorganic mode.

Cheaper imports and new players in the market will keep the market competitive and may keep the margins under pressure. Since the two main raw materials, namely Bisphenol-A and Epichlorohydrin, are imported, fluctuations in foreign exchange may impact margins.

INTERNAL CONTROL SYSTEMS

Internal control systems of the Company are commensurate with the nature of its business and size and complexity of its operations. The controls, based on the prevailing business conditions and processes, are tested during the year and no reportable material weakness in the design or effectiveness was observed.

The Company has an in-house Internal Audit department consisting of professionally qualified managers. It has also engaged the services of reputed firms specialising in Internal Audits. The Internal Audit function provides assurance to the Audit Committee on the adequacy and effectiveness of internal controls and compliance with operating systems at all locations of the Company, its subsidiary and joint venture companies. Internal audits are also carried out for Atul Foundation and entities overseen by it. The operating effectiveness of internal financial controls is also tested during course of each audit. Key audit findings and remediation status of prior findings are presented and discussed with the Audit Committee.

Audits are conducted in accordance with a risk based internal audit plan which is duly approved by the Audit Committee.

The scope and coverage of internal audit plan includes reviewing and reporting on key process risks, adherence to operating guidelines and statutory compliances.

Processes in the Internal Audit function are continuously strengthened for enhancing effectiveness and productivity, including use of analytical tools in the audit domain and ongoing knowledge improvement programs.

HUMAN RESOURCES

The Company continued with its drive to institutionalise and upgrade its HR processes to help build a more robust workforce capable of managing dynamic and growing business needs. In particular, it focused on improving its processes related to performance management, succession planning, specific need based development and systems enhancement to facilitate all HR processes.

The process of identification and review of targets is becoming more robust and is continuously upgraded. During 2018-19, on an average, 2.5 mandays of training was imparted. The training needs are identified based on self-assessment, L+l assessment, 360 degree feedback and Individual Development Plan. In addition, there are certain team building programs to integrate work teams. Succession planning process is being enhanced so that, to the extent possible, people from within take up higher responsibility. Identified managers are being nominated on specific external Management Development Programs to enhance functional and behavioural competencies and build leadership pipeline.

The number of employees (as on March 31, 2019) increased by 120 from 2,454 to 2,574. 70% of this increase was mainly due to new positions on account of expansions in manufacturing operations of various businesses.

Historic wage settlement was concluded at Ankleshwar site in which the Union agreed to an increase of a certain fixed percentage of wages till retirement and wages are restructured in a way that they are not dependent of any external factors. Wage settlement at Atul site is under discussion. Employee relations at all locations remained cordial and progressive, and the endeavour is to completely eliminate any divide that separates managers and workmen and use the strengths of everyone to enhance the performance of the Company.